Crypto has attracted a lot of attention, but there is another crypto-related technology that is gaining popularity – DeFi (decentralized finance).
The new service allows users to access their money without relinquishing control over how they use it or trusting third parties like banks with private information. It also means there are no limits to what you can do with your money. In short, it turns cryptocurrencies into currencies for everyday transactions. So far, so good? Not quite yet…
Celsius Issues: Issues with “CeDeFi”
The most popular example of DeFi right now is Celesius Inc.’s Celsius, which launched its mainnet less than two months ago. While the app itself isn’t complicated, some people have criticized the project for being too similar to other “stablecoin” projects like MakerDAO. Stablecoins are digital tokens that are linked 1:1 to real assets such as dollars or euros. This design choice makes them resilient to price volatility caused by high trading volumes. However, critics say that while stablecoins may be more reliable than traditional currencies, this approach does not solve centralization problems inherent in fiat banking systems. Some even argue that these coins could become just another tool used by major financial institutions to extract value at the expense of regular customers.
So why would anyone want to use DeFi? Well, many believe that DeFi offers vastly improved privacy, security, reliability, speed, cost-effectiveness, accessibility, transparency, accountability, and user experience compared to existing payment solutions. Here’s a breakdown of how both DeFi and CeFi stack up against each other when looking at these features.
DeFi vs. CeFi: Comparing Decentralized vs. Centralized Finance
Decentralized financial platforms offer several advantages over their centralized counterparts. For example, they allow users to avoid censorship and surveillance attacks by government agencies. Because blockchain technology allows for data integrity and immutability, records cannot be altered once they are created. Unlike traditional organizations where employees can make mistakes due to human error and lack of oversight, blockchains guarantee accuracy through cryptography and self-regulation.
Additionally, DeFi networks are typically run directly by community members who receive rewards for helping the network run smoothly. Finally, unlike large corporations, DeFi platforms typically operate 24/7 and never go offline.
While all major DeFi services currently operate online, only one in three DeFi apps –
MakerDAO – Dai – is open source. open source software | Open Source Development Foundation
As for centralized funding, modern bank accounts offer convenient ways to send payments between individuals and businesses around the world. However, banks charge fees to access their services and can suspend your account if you don’t meet certain requirements. In addition, centralized institutions have limited ability to resolve disputes or implement changes to customer agreements. They also give clients little power to influence financial manager decisions.
Another downside to using a regulated financial institution is that it ties your assets to the performance of that entity. If the latter fails, you are stuck with the losses incurred. In addition, there is always a chance that regulators will decide to take away your savings and impose restrictions on future transactions. Finally, regulatory compliance standards differ from region to region, meaning your local bank may be perfectly legal in one country but illegal in yours.
DeFi Risks and the Decentralization Illusion
According to research by The Wall Street Journal, approximately $2 trillion in consumer debt lies uncollectible in US federal courts. That figure alone should dispel the notion that we live in a post-financial crisis world. Unfortunately, the same report found that nearly half of Americans mistakenly believed that central agencies like governments and big tech companies play an active role in protecting consumers’ personal finances. As a matter of fact, Many people mistakenly assume that DeFi works similarly to centralized finance. However, this view could not be further from the truth.
Negative effects of DeFi
On the other hand, DeFi still suffers from several shortcomings and challenges typical of emerging technologies. First, due to the young nature of the industry, DeFi protocols often do not support all of the features demanded by end users. Second, many DeFi platforms, while equipped with built-in mechanisms to prevent fraud and theft, can fall victim to hacks and scams perpetrated by malicious actors. Finally, while DeFi offers users more flexibility and freedom, it typically requires a higher level of technical expertise to set it up properly.
DeFi is “trustworthy”
First, DeFi does not rely on trusted intermediaries or gatekeepers to act as middlemen. Instead, it uses smart contracts written specifically for each transaction that runs on it. Therefore, DeFi providers need to ensure liquidity before opening markets to trading. Otherwise, users could get burned if they try to exit positions early. Since DeFi applications are open source code themselves, developers can audit their own software to ensure everything is running smoothly. As a result, they can troubleshoot faster than centralized organizations.
Second, DeFi users enjoy unprecedented control over their finances thanks to transparent reporting and public audit tools. Users can easily verify that their wallets actually contain the amount they deposited. At the same time, block explorers allow participants to view details of individual transactions, including amounts sent and received, gas prices, contract hashes, etc. All of this information is publicly available via APIs, making it easy to build competitive DeFi-based products and services to create protocol.
Third, successful startups behind leading DeFi platforms regularly outperform established global conglomerates in terms of profitability and growth rate, despite fewer resources, smaller teams, and shorter product development times. For example, according to Coin Market Cap, Binance Labs recently became the largest shareholder in TrustToken after acquiring 72% of the shares in Q3 2021. Meanwhile, Visa ranked 11th among the largest Ethereum Classic company holders last year. Fourth, DeFi users benefit from reduced costs associated with the investments required to build infrastructure. Since DeFi providers do not rely on external sources of funding, they do not require expensive office buildings, servers and IT staff salaries. Rather, they invest solely in maintaining the core functionality of the platform.
Finally, DeFi application owners retain ownership of their assets in perpetuity. No single party controls access to sensitive metadata related to users’ identities and credits. As such, they will not have any issues with identity verification and KYC procedures common to legacy banking systems.
While DeFi protocols promise convenience and autonomy, they still require extensive training and education to understand how they work properly. Many DeFi newbies prefer to learn about the nuances of blockchains rather than understanding complex concepts like collateral and over-collateralization in relation to fractional reserves.
Despite its limitations, DeFi appears poised to disrupt legacy financial models. However, the success of the former depends on regulators’ ability to adapt quickly enough to mitigate potential threats from innovative DeFi innovations. Though a handful of jurisdictions are taking steps to regulate DeFi, others continue to lag behind. Notably, following a series of scandals surrounding Facebook’s Libra coin, US lawmakers have introduced a bill aimed at blocking Facebook from launching digital assets until regulations are enacted.
It remains unclear whether government policymakers will ultimately embrace DeFi innovation by embracing regulation or vice versa. There is certainly room for improvement in terms of policy making around the space. It is possible to start today and learn crypto. https://cryptocrooks.com/best-crypto-products/
Disclaimer: The information contained herein is provided without regard to your personal circumstances and therefore should not be construed as financial advice, investment recommendation or an offer or solicitation to engage in transactions in cryptocurrencies.